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Spring 2006Newsletter

Can An Unenforceable Contract Still Be An Agreement?

Intellectual Property Update

Age-related macular degeneration (AMD) is an ocular disease that is the predominant cause of vision loss in people over age fifty. Several researchers have investigated the use of photosensitive drugs to treat AMD. Researchers from the Massachusetts Eye and Ear Infirmary (MEEI) met with executives of QLT Phototherapeutic Inc. to discuss the possibility of utilizing benzoporphin derivatives developed by QLT for the treatment of AMD. QLT agreed to provide these materials to MEEI for research trials.

The patent attorney for QLT, Ms. Murashigi, prepared and filed a patent application (the '473 application) covering certain methods of therapy using QLT’s materials. The named inventors included only MEEI's personnel, and thus the application was assigned to MEEI alone. QLT had no ownership interest in the ‘473 application.

Subsequently, Murashigi proposed to MEEI that the '473 application could be improved upon by modifying the scope of the patent claims, arguing that it would strengthen the application to include certain additional methods of treatment invented by one of QLT's own researchers, and by researchers from another of QLT’s research partners. Since these additional researchers had contributed to the invention of this additional form of treatment, the addition of new patent claims would make these additional researchers co-inventors, and thus give QLT and its other research partner ownership interests in the resulting patent.

With the agreement of all parties concerned, a "continuation-in-part” patent application (the '591 application) was prepared. Murashige removed from MEEI’s '473 applications those claims which broadly covered the additional methods of treatment, and added those claims to the '591 application.

MEEI agreed to this reshuffling of the patent claims because it received assurances from QLT that it would receive fair compensation for its contributions, in view of the fact that it was no longer the sole owner of the patent claims transferred from the ‘473 application.

The '591 application eventually issued as U.S. Patent 5,798,349 (the '349 patent) to MEEI, QLT, and QLT’s other research partner. By virtue of its partial ownership of the '349 patent, QLT is now able to license the treatment methods covered thereby, without accounting financially to MEEI. Moreover, because of its ownership of the underlying patents on the benzoporphin derivatives required for these treatment methods, QLT alone can effectively exploit the rights conferred by the '349 patent.

At this point the parties had a falling out over the compensation to be paid to MEEI. MEEI therefore sued QLT for breach of an express contract, but that claim was denied by the trial court on the ground that the parties had failed to reach an agreement whose terms were sufficiently determinate to constitute a binding contract. QLT had promised to compensate MEEI, but the parties had left the terms of that compensation too vague.

MEEI also argued that there was an implied contract, but this claim was also thrown out on the same grounds. It also argued that QLT had violated an implied covenant of good faith and fair dealing, but this argument also failed because there was no contract between the parties to raise such an implied covenant. Several other claims (conversion and misrepresentation) were similarly denied on technical legal grounds.

MEEI also asserted a claim for unjust enrichment. The trial court threw that one out as well, but on appeal a higher court restored the unjust enrichment claim, ruling that a claim of unjust enrichment is appropriate where an agreement is too indefinite to be enforced or where no contract is made because each of the parties had a materially different understanding of the terms. The appellate court held that, although QLT's assurances that it would pay MEEI were not specific enough to support MEEI's contract claims, they formed a key component of MEEI's unjust enrichment claim and presented a triable issue of fact. Massachusetts Eye and Ear Infirmary v. QLT Phototherapeutics Inc., 75 U.S.P.Q.2D 1225 (1st Cir. 2005).

But MEEI had another problem. Unjust enrichment is a matter of state law, but QLT argued that this was a patent dispute, and the patent statute is federal law which preempts any inconsistent state law. The appellate court, however, rejected this defense as well. It ruled that MEEI's claim was not that the new inventors were not proper additions to the '349 patent, which would have been a pure question of federal patent law. Rather, MEEI’s claim was that QLT had induced MEEI to agree to the change in scope of the claims, and then unjustly profited from that change by denying fair compensation, a claim which not in any way implicate federal patent law.

In reply, QLT read chapter and verse from the patent statute, which says: "In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention *** without the consent of and without accounting to the other owners." Therefore, QLT argued, MEEI’s claim to a financial accounting was inconsistent with the patent law, and should be preempted.

Not so, said the appellate court. Focusing on the italicized words above, that court noted that the patent statute itself admits of an exception to the patentee’s rights when there is an “agreement to the contrary." And, said the appellate court, the patent statute does not say that that “agreement” must be a fully enforceable contract!

Thus, although the alleged agreement in this case was not enforceable as a matter of contract law, it might still qualify as an "agreement" under the patent statute, and therefore it could form the basis for a claim of unjust enrichment without any conflict with federal law.

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